The United States Commodity Futures Trading Commission and the European
Commission: Common approach for transatlantic CCPsi
10 February 2016
The European Commissioner for Financial Stability, Financial Services and Capital Markets
Union, Jonathan Hill, and United States Commodity Futures Trading Commission (CFTC)
Chairman Timothy Massad today announced a common approach regarding requirements
for central clearing counterparties (CCPs).
Commissioner Hill said: “This is an important step forward for global regulatory convergence.
It means that European CCPs will be able to do business in the United States more easily and
that US CCPs can continue to provide services to EU companies. It has taken a long time, but
it is good news that after more than three years of discussion, we are now able to provide
certainty for the marketplace. I am grateful to Chairman Massad and his team for all their
work in helping us get to this point.”
Chairman Massad said: “Our agreement is critical to ensuring that our global derivatives
markets remain robust, while keeping our financial system as stable and resilient as possible.
It is a significant milestone in harmonizing regulation of these markets. I thank
Commissioner Hill for working in a constructive and collaborative manner to resolve this
issue.”
The approach
Following this agreement the European Commission intends to adopt shortly an equivalence
decision with respect to CFTC requirements for US CCPs which will allow ESMA to recognise
US CCPs as soon as is practicable. Once recognised by ESMA, US CCPs may continue to
provide services in the EU whilst complying with CFTC requirements. The CFTC staff will
propose a determination of comparability with respect to EU requirements, which will
permit EU CCPs to provide services to US clearing members and clients whilst complying with
certain corresponding EU requirements. The CFTC staff will also propose to streamline the
registration process for EU CCPs wishing to register with them.
Derivatives markets are global in nature. A common approach to their regulation and
supervision is critical to supporting cross border activity and maintaining financial stability.
Both the CFTC and EU requirements are based on international principles, which accounts
for the high degree of similarity between the two regimes. The CFTC staff and the European
Commission will work together, along with counterparts across the global regulatory
community, to enhance the granularity of these principles and further harmonise the
standards to which internationally active CCPs are held.
The steps needed to implement this agreement will be put into place as soon as practicable.
The CFTC staff and the European Commission Services will work to ensure that changes are
implemented in a coordinated manner, and to monitor the impacts resulting from the
sequencing of the changes and assess whether any further actions must be taken to ensure
financial stability or prevent regulatory arbitrage.
The common approach follows detailed analysis of the CFTC and EU regulatory requirements
and of the financial resources of EU and US CCPs.
Key elements of the approach:
1. EU Equivalence
The European Commission will shortly propose for adoption an equivalence decision in
respect of US CCPs. Equivalence is necessary so that ESMA can recognise US CCPs wanting to
serve EU markets. Once recognised by ESMA, a US CCP may continue to provide services in
the EU by complying with US requirements. It will also become a qualifying CCP for the
purpose of the EU Capital Requirements Regulation, lowering costs for EU banks and their
subsidiaries.
The proposed determination of equivalence is based on the condition that CFTC-registered
US CCPs seeking recognition in the EU confirm that their internal rules and procedures
ensure:
- for clearing members' proprietary positions in exchange traded derivatives, the collection
of initial margins that are sufficient to take into account a two day liquidation period.
- that initial margin models include measures to mitigate the risk of procyclicality.
- the maintenance of 'cover 2' default resources.
The conditions will not apply with respect to US agricultural commodity derivatives traded
and cleared domestically within the US. This takes account of the significant nexus of these
US contracts with the US economy, the importance of these contracts to US farmers and
ranchers and recognises the low degree of systemic interconnectedness of these markets
with the rest of the financial system.
In addition, the European Commission will shortly propose the adoption of an equivalence
decision under EMIR to determine that US trading venues are equivalent to regulated
markets in the EU, providing a level playing field between EU and US trading venues for the
purposes of the MIFID I framework.
Before an equivalence decision is adopted by the Commission, Member State authorities
must vote in the European Securities Committee. Once a decision is adopted, ESMA will
proceed to complete the process for recognising applicant US CCPs, including the execution
of a cooperation arrangement with the CFTC, providing for the ongoing sharing of
information with respect to CFTC-registered US CCPs recognised in the EU. During the
recognition process, CFTC-registered US CCPs will continue to benefit from any transitional
relief under the Capital Requirements Regulation including any extensions that are granted.
2. CFTC Substituted Compliance
The CFTC staff will propose a determination of comparability, concluding that a majority of
EU requirements are comparable to CFTC requirements. This determination will provide a
basis for both EU CCPs already registered with the CFTC as derivatives clearing organisations
and those seeking registration to meet certain CFTC requirements by complying with the
corresponding requirements as set forth in EMIR. In addition, the CFTC staff will propose to
streamline the registration process for EU CCPs wishing to register with it, reflecting these
similar requirements.
This process will be completed within the same timeframe as the process for EU equivalence
and recognition of CFTC-registered US CCPs.
3. Next Steps
The steps required to implement this agreement will be put into place as soon as
practicable. The CFTC staff and the European Commission Services will work to ensure that
changes are implemented in a coordinated manner, and to monitor the impacts resulting
from the sequencing of the changes and assess whether any appropriate action is needed.
The CFTC staff and the European Commission Services will continue to cooperate closely to
ensure that the agreed approach is applied consistently and continues to be appropriate
with respect to CFTC-registered US CCPs and EU CCPs. Moreover, we will monitor any
potential regulatory arbitrage between CFTC-registered US CCPs and EU CCPs. Further, we
will continue to monitor global trends and to cooperate closely with each other and with our
counterparts across the global regulatory community to ensure that the development of
internationally active CCPs outside the European Union and the United States do not create
new scope for regulatory arbitrage. The European Commission will continue to monitor
jurisdictions for which equivalence has been determined on the basis of proportionality or
otherwise, to ensure that differences do not create an unlevel playing field across borders,
and may take action accordingly.
EU Clearing Obligations
The European Commission Services recognise that EU market participants may wish to use
CFTC-registered US CCPs to satisfy their upcoming central clearing obligations under EMIR.
The first phase of clearing obligations for certain interest rate derivative contracts does not
take legal effect until 21 June 2016. Market participants may choose to continue to clear
these contracts in non-recognised CFTC-registered US CCPs up until that date. This includes
contracts concluded on or after 21 February 2016 that are subject to the frontloading
obligation. The European Commission Services and the CFTC anticipate that CFTC registered
CCPs will be in a position to be recognised by that date and the CFTC will work closely with
ESMA to facilitate this process.
Client margining standards
ESMA has recently consulted on the possibility for EU CCPs to apply an alternative standard
for client margining. This would allow EU CCPs to comply with standards similar to CFTC
requirements in this particular area. Such a change would reduce the possibility for
regulatory arbitrage across jurisdictions whilst maintaining high regulatory standards.
Therefore, it is necessary to proceed rapidly with the adoption of the relevant standard. The
European Commission Services are of the view that any such alternative should also address
the scope for regulatory arbitrage between US and EU standards with respect to margin
obligations for clearing members and their affiliates.
Further work on international harmonisation
The CFTC staff and the European Commission recognise that the cleared derivatives markets
are developing and expanding at a rapid pace across the globe.
CFTC requirements and EU requirements are both based on international minimum
standards which accounts for the high degree of similarity between the two regimes.As part
of this process, the CFTC staff and the services of the EC assessed differences where the
CFTC requirements can be considered to be more stringent than the EU requirements and
other differences where the EU requirements can be considered to be more stringent.
Nevertheless, the CFTC staff and the European Commission Services believe that there is
scope to expand the range of, and add further detail to, the international principles in this
area. In particular, CPMI-IOSCO work on CCP resilience provides an opportunity to reflect on
whether the standards contained in the PFMI for initial margin methodologies are
sufficiently granular and robust.
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The common approach references only the CFTC's requirements for derivatives clearing organisations. It does
not reference the United States Securities and Exchange Commission's (SEC) requirements for clearing agencies
which is a separate and distinct regime. The European Commission continues to be in constructive and
progressive discussions with SEC staff regarding the SEC's requirements, in the context of the European
Commission's analysis of equivalence.